The smart solution is clear: a land value tax

We have a regressive system where people in modest homes pay a bigger proportion in tax

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The Independent Online

There is stiff competition but stamp duty on house purchases has a strong claim to be Britain’s worst tax. That’s “worst” in the sense it creates economic distortions while doing absolutely nothing to guide behaviour in a socially helpful direction.

Labour reintroduced stamp duty bands in 1997. These kicked in on the entire value of properties sold above £60,000 (1 per cent), £250,000 (2 per cent) and £500,000 (3 per cent). But there was rampant house- price inflation in the next decade (10 per cent a year on average) and politicians failed to lift the thresholds in step. The result was more home sales were pulled into the tax net. The proportion of property sales liable for stamp duty rose from half in 1997 to three-quarters in 2003.

Governments have been fiddling around the edges since. Alistair Darling removed the tax from most first-time buyers. George Osborne brought it back (although he has replaced the perk with equity loans and subsidised mortgages). His Labour shadow, Ed Balls, still talks of granting new buyers a “holiday” from the duty. But this is no way to run a taxation system. Short-term relief and arbitrary tinkering creates uncertainty and pushes the problem out to another day.

Our political leaders should design a housing taxation system that will last. An obvious imperative is to remove the cliff-edge characteristics of this levy, whereby the full value of a property becomes taxable at a sharply higher rate above certain thresholds. This is an invitation to buyer and seller to collude in massaging the nominal price. There will be more of that behaviour now the average house price has reached £250,000, where the 3 per cent rate kicks in.

But reforming stamp duty ought to be linked to an overhaul of property taxation. It is ridiculous that politicians have not dared to revalue the council tax bands since the early 1990s. The result is a regressive system where people in modest residences pay a much larger proportion of the value of their homes in tax every year than the inhabitants of mansions. A mansion tax could be a solution, although the same could be achieved with less hassle by revising council tax bands.

Best of all would be a land value tax, requiring property owners to pay an annual levy based on the market value of the plot of earth beneath their home. This could potentially replace stamp duty, council tax and even business rates. It would encourage more housebuilding by discouraging land hoarding, penalise those who leave properties empty and ensure people paid for windfalls to their home values from new transport links etc. Sensible politicians should be all over it.